$12 Billion Slippery Slope

People Desk
$12 Billion Slippery Slope $12 Billion Slippery Slope

Saddled with more than its fair share of economic hardships, the Rouhani administration has a major problem on its hands (hands that are full of everything minus the money needed to run the affairs of 80 million Iranians with apparently high expectations). For obvious reasons, the cash subsidy policy that President Hassan Rouhani inherited from the former government, is crumbling under the weight of its own contradictions.

The six-year-old cash handout system is infamous, inefficient and ineffective.  Simply put, the money is not there to dole out a billion dollars every month to an estimated 70 million beneficiaries (450,000 rials or $13 per person per month).  

When former president Mahmoud Ahmadinejad launched the highly controversial subsidy reform plan oil was king and sold for $140 a barrel. Today oil is old and orphaned and barely fetches $35.

Needless to say, two years into the subsidy reform plan, the then government ran into trouble as it did not have enough to make the costly monthly payments and so the central bank’s printing machines went into full swing. As the worthless banknotes flooded the market inflation jumped to 40% in 2013 – the year Ahmadinejad left office after two terms leaving behind economic ruin for his successor to inherit.

Even before the costly cash payments started, economists and social scientists had warned about the consequences and severe negative impact on the economy. They begged the government to put the subsidies removed from food and fuel to better use, namely build industries, expand agriculture, improve infrastructure and generate jobs for the army of unemployed. All those and other appeals fell on deaf ears as the populist government did not have the time and patience to hear voices opposed to its type of governance that eventually ushered in economic disaster, to say the least.

Over the past several weeks the Majlis is studying the 2016-17 budget proposed by the government and has come across deep holes. The income-expenditures figures don’t match. Annual income is projected at $42 billion while expenditure is close to $56 billion.    

The total budget for the year, however, is $274 billion and will include income from taxes, sale of investment and financial assets, general resources, the government’s exclusive budgetary resources plus the income from state/government companies, profit-making institutions affiliated to the government and banks.    

Earlier this month the Majlis told the government to remove another 24 million people from the cash subsidy list, namely heads of households making 350 million rials or $10,000 a year. This should have been sound of music for the executive branch unable to put together the staggering amounts to pay each and every month.

But it hesitated and for understandable reasons. Though it did not say it in as many words, it was apparent that Rouhani and his men do not want to have anything to do with the possible political fallout of such a drastic decision, that too a year before the next presidential elections. After all, what makes economic sense does not always bode well for good politics – an unwritten covenant politicians know terribly well.

 As per the parliament’s decision, in addition to the heads of households earning more than $10,000 a year (both self-employed or employed by public or private sectors), from the beginning of the fourth month (June 22) of the current Iranian year (started March 20), all lawmakers, judges, executive board members of state-run and Azad universities, physicians, dentists and Iranians living abroad will be excluded from the list.

According to the new law, providing false information on assets/revenues will lead to removal from the list as well as penalty that would be double the amount of the cash subsidy fraudulently obtained.

The legislation was passed by 125 votes in favor, 67 against and 4 abstentions.

Mohammad Baqer Nobakht, government spokesman, said last year, (ended March 19), the Ministry of Labor, Cooperatives and Social Welfare had removed nearly three million people from the cash subsidy list, the same number figuring in the new legislation.

  Comprehensive Database Lacking

One important issue that is worthy of mention is that there is no comprehensive and integrated database to identify and classify the rich, or for the matter, the poor and needy. As long as there is no proper identification of the various economic strata, such legislation will not be effective.

However, some analysts and experts have a different opinion. They admit that pinpointing the rich is no easy task for a million reasons. But they insist that this is not the same for the poor and needy.

“Records with the various state organizations, like the Imam Khomeini Relief Foundation, the State Welfare Organization and other charities can and should help address this dilemma,” says one close observer of the subsidy calamity.

Hamid Taherinejad is of the strong opinion that “in the worst case scenario, not more than 10% of the people are in need of help to make ends meet.” He points to the families of drug addicts, those serving time for smuggling and/or other crime and women breadwinners who may need help in cash or kind.

Hossein Raghfar, respected economist and faculty member at the prestigious Alzahra University says the reform plan has been “harming economic growth and productivity.” It has created high expectations among all sections of the society, both rich and poor, waiting for monthly handouts without any effort. “They believe the cash subsidy is their inalienable right and changing that belief is really difficult,” he told an economic journal.

The subsidy plan is harmful for all the people, he says.  “At present, the country’s natural resources are wasted on people’s consumables, while they should be used for infrastructure development, namely the construction of schools, bridges, roads, hospitals and public transport.”

The subsidy reform plan “was not implemented wisely from inception… In the current situation, identification of the weaker sections of society and allocation of the cash subsidy to them would be more effective than identifying the rich who can and must be removed from the list.”

According to the university instructor who has held senior economic planning positions in the past, “not more than 8% to 10% of people suffer from lack of proper food and need direct financial support.”

In February Abdolreza Azizi, head of Majlis Social Commission, said the government will stop paying cash subsidies to 15 million “rich” people from the new Iranian year (started March 20), unlocking 81 trillion rials ($2.2 billion) for the poor.  “The measure has been incorporated into the next fiscal year’s budget plans.”

The Minister of Cooperatives, Labor and Social Affairs Ali Rabiei announced in December that the government had removed 2.9 million people from the cash subsidy list.

Now it remains to be seen if the policy and decision makers will put an end to the confusion over the subsidy conundrum and when we the government and people will learn to live within their means and not spend the money they don’t have!